Texas Dust-Bowl Redux Spurs Record U.S. Cotton Loss, Farm Claims

The worst Texas drought in more than a century has left cotton-crop conditions that rival the Dust Bowl of the early 1930s, forcing farmers to abandon more fields than ever before.

Most growers will at least break even this year from insurance claims, with the reimbursement rate on policies higher than the price of New York cotton futures, according to a Bloomberg News survey of seven analysts, brokers and farmers.

“The number and severity of claims in the Texas Panhandle, High Plains, rolling plains and backlands will be substantially higher than recent years,” said Ted Etheredge, president of Lubbock, Texas-based Armtech Insurance, the fifth-largest U.S. writer of federally sponsored crop-insurance policies. “The drought is severe, so non-irrigated acreage in most areas had emergence issues, and now irrigated crops are suffering.”

Harvest prospects in the U.S., the world’s largest exporter, have dimmed this season as Texas endured the worst drought since record-keeping began 116 years ago. Prices rallied from a 10-month low two weeks ago and are 22 percent higher than a year ago, boosting costs for apparel makers including Levi Strauss & Co. and Hanesbrands Inc., and Hennes & Mauritz AB (HMB), the world’s second-largest clothing retailer.

Poor Condition

About 61 percent of the Texas crop was in poor or very poor condition on Aug. 7, compared with 7 percent a year earlier, U.S. Department of Agriculture data show. Texas accounted for 44 percent of output last year in the U.S. On July 12, the USDA cut its month-old forecast of U.S. output by 5.9 percent to 16 million bales. A bale weighs 480 pounds, or 218 kilograms.

About half of Johnie Reed’s 6,000-acre farm in Kress, Texas, 60 miles north of Lubbock, was scorched by the dry spell. Reed said he insured 60 percent of his non-irrigated crop with policies that ensure a government-mandated claim rate of $1.23 a pound. That’s 26 percent more than prices on ICE Futures U.S. in New York, which have tumbled 56 percent since touching a record $2.197 on March 7 because of slowing demand in China, the world’s top buyer.

“It’s not a good year, and it doesn’t look pretty, but financially we’ll be breaking even with the insurance” on the 2,800 acres of non-irrigated crops, Reed said by telephone. The 3,200 acres of irrigated cotton probably will be profitable, yielding about one bale an acre, approximately half the normal output, he said.

The government on July 12 forecast that 30 percent of the U.S. crop will be lost, topping the previous record of 26.9 percent in 1933, when dust storms wiped out fields in Texas and Oklahoma amid the Great Depression.

Abandoning Crop

Six traders, analysts and brokers in a Bloomberg News survey estimated more than half the fields in Texas this year will be abandoned, compared with a record 42.1 percent for the state in 1998. Only about a third of fields are irrigated in Texas.

“We’re going to have record abandonment this year,” Keith Brown, president of Keith Brown & Co., a broker in Moultrie, Georgia, said by telephone. U.S. output may drop to as low as 13 million bales this year, he said.

Abandonment in the High Plains region of Texas, the biggest growing area, may reach 50 percent, the highest since 53 percent in 1992, Lubbock, Texas-based Plains Cotton Growers Inc. said.

Increased Payments

Insurers may pay out more to growers this year than they collected in premiums for the first time in nine years. About 60 percent of what farmers spend on policies is federally subsidized.

In 2002, payouts of $4.1 billion were 1.39 times more than premiums of $2.9 billion, according to data from the Risk Management Agency, a USDA division. Last year, premiums totaled $7.6 billion, compared with payments of $4.2 billion, or a ratio of 0.56, the lowest since 2007. In 1993, the loss ratio for insurers reached 2.19 after flooding and excessive moisture hurt crops.

Estimates for this year’s claims will be released next month, according to the Risk Management Agency.

The worsening Texas crop is reviving cotton prices that plunged from a record in March as demand from China waned, dropping 41 percent in the three months ended June 30. Since touching a low of 93.2 cents on July 26, cotton futures are up 4.8 percent, forcing some clothing companies to raise prices.

“The higher cost of cotton will continue to negatively impact our margins and working capital as we move through the remainder of 2011,” Blake J. Jorgensen, the chief financial officer for Levi Strauss & Co., said during a July 12 earnings conference call with analysts. Levi’s boosted prices earlier this year on men’s products and recently increased prices on women’s and children’s apparel, Robert Hanson, the president of Levi’s Global Brand, said during the call.

The Uninsured

Ron Craft, a fourth-generation cotton ginner in Plains, Texas, said he expects his business to plunge by at least 75 percent. Last year, his gin processed crops that yielded about 85,000 bales of cotton. Less output means he and other ginners won’t be able to hire as many seasonal workers for warehouse and trucking jobs, Craft said in a telephone interview.

“I’ve got those people that come back every year depending on me for a job, and I may not be able to provide that for them because of the lack of cotton to process,” Craft said.

As a ginner, Craft cannot purchase crop insurance, and claims this year will “definitely, no doubt, be the most I’ve ever seen,” he said. “I’ve got growers right now who, realistically, if they could terminate their crop and not have to put any more inputs into it and take that insurance claim, they’d be a lot better off.”

To contact the reporters on this story: Justin Doom in New York at jdoom1@bloomberg.net; Debarati Roy in New York at droy5@bloomberg.net

To contact the editor responsible for this story: Steve Stroth at sstroth@bloomberg.net

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